By David Marrison, Extension Educator
With all the changes in Washington, we at OSU Extension have gotten a lot of questions on what may be in store for tax reform n 2017? Most of the experts are saying we will see the most comprehensive tax reform since the tax reforms of 1986 by President Ronald Reagan.
Some of these proposed tax changes could happen while others will just be fodder for talk shows and columns like this one. Given the shift of control to the Republican side of the aisle, it is wise to look at the “A Better Way” report released by Speaker Paul Ryan last summer for some potential tax reforms. For those who want more insight, the complete report can be found at: http://abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf.
So let’s peak into the crystal ball…..
Estate Tax- At the beginning of January, House Resolution 198 titled the “Death Tax Repeal Act of 2017” was introduced into Congress and it currently sits in the Ways & Means Committee (https://www.congress.gov/bill/115th-congress/house-bill/198). This bill is seeking to eliminate the federal estate tax. This is one area where I caution us to be careful of what you wish for! On the outside this may look like a good move but in the long run it could mean higher taxes for farmers and small businesses.
Currently, Americans can pass on $5,490,000 to their heir(s) tax free when they die. The federal estate tax law also includes portability to a spouse which essentially means as a couple we can pass on a combined $10.98 million tax free to our heirs. Even better, Ohio, led by Governor Kasich, repealed the Ohio Estate tax in 2013. So, if your estate is less than $5.49 million as an individual or $10.98 million as a married couple you should have very little concern in this area. And given that less than 0.2 percent of all estates are subject to federal estate tax each year, should this really be on the chopping block?
So what am I concerned about? The introduced bill has very little in the way of detail. And the detail will be important. One item that could disappear if the estate tax is eliminated is the ability for heirs to “step-up” the value of the inherited assets to its current market value at death. This could be a significant loss to most farming operations.
Again, the detail in the Repeal Act will be important. It has been suggested a complete repeal of the estate tax could pave way for a capital gains tax collection at death. So imagine your heirs having to pay a 20% capital gain tax on the assets from your estate when you die. For a $2.5 million dollar farm in Ohio, this would mean $500,000 in taxes versus $0 under our current system. Ouch! Be careful what you wish for as the truth will be in the detail! We need to know what a repeal of the federal estate tax actually means.
Complete Expensing of Equipment & Buildings- The administration is also advocating for businesses to be able to completely write-off the expense of any building or equipment in the year of its purchase instead of recovering its value through a depreciation schedule. This too could have some unattended consequences. Again, the truth will be in the detail.
I think it matters very little on how we recapture the cost of these purchases. We have used Accelerated Bonus Depreciation and Section 179 for fifteen years to recapture the cost of capital purchases quicker. My main concern is that complete expensing could cause a Net Operating Loss. This could lead to the farm family not paying anything into Social Security and Medicare or at such a low level that it would affect their retirement years. So while it may look good in the short term, without changes to how we pay into Social Security, it could lead to farmers not having enough eligible quarters to retire or be covered under Medicare. Again, be careful for what you wish for as the truth will be in the detail.
Border Adjustment Tax (BAT)- There has been a lot of chatter on the potential impact of implementing a border adjustment tax or BAT. This tax would be a huge change in the way we do business as Americans. Currently, products shipped overseas bear the cost of income tax where imported products don’t. In short, it could be considered a tariff without being called such. It would be a huge revenue source for the government and would promote domestic production. It is similar to the Value Added Tax used by many of our trading partners. The BAT along coupled with the proposed reductions in the tax rates for businesses should be a major catalyst for businesses here in the United States.
So, how will the BAT impact agriculture? More specifically, how will it affect our trade relations especially with the top three international buyers of agricultural exports- Canada, China, and Mexico? I think most sectors of the economy will be weighing in on the BAT issue. Many retailers are very opposed to a border tax as a large percentage of the products they sell are imported. For agriculture, it is anticipated it would add 10-15% to some of the costs of our inputs such as diesel fuel and to other inputs such as fertilizer and equipment. The BAT debate is going to be fascinating to watch. Make sure to keep asking your legislators how it will impact agriculture!
Summary- My recommendation is not to fall asleep on policy and tax reform in 2017. Be engaged, ask questions and ask how it will impact your operation and our entire industry in the short term as well as long term.